Q: Have a question about the residential cap gain exclusion. I have been renting my home of 18 years for 2 years now. I would like to continue renting and keep ownership for a couple more years because my plans are indefinite. To qualify for the exclusion I know I must live in the house 2 of the prior 5 years when I sell. But could I transfer ownership of this house to a trust or do something else to qualify for the cap gains exclusion (and step the basis up to today’s value) during the time window? I think the Congress’ intent with the exclusion is to reward homeowners who meet the home ownership requirements, not to penalize home owners who choose to get into rental property. Of course, that’s only my guess, and their intent may be secondary to the IRS interpretation. Any thoughts you have on this are greatly appreciated.

A: I couldn’t hazard a guess of what Congress’ ulterior motives might be…. So let’s just take what’s on paper.

You have two options with regard to your rental property: First, you can move back into the home for 2 years and convert it to a personal residence. But if you’ve been depreciating that property for the 18 years prior, you will still have to recapture some of that depreciation. Then you would be able to take the rest of the profits (up to $250,000/$500,000 depending if you’re married or single) tax free.

But this is mess. A better way to do it would be to keep the property as an investment property and use a 1031 Tax Free Exchange (also known as a Starker Trust). You can sell the property and identify a like-kind investment property to purchase within 45 days of the sale. Then, complete your purchase within 180 days. (There are other rules and regulations so be sure to work with a real estate attorney and 1031 third party company.)

You will be able to roll over all of your profits on the sale and defer taxes until you sell the next property. Your attorney can help you with the details. If you decide to sell, Congress has helped you, too. The long-term capital gains tax right now is 20 percent. It is going to 18 percent. So if you sell in a few years, you’ll probably only pay 18 percent tax. That’s much less than income tax.